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Bernanke, Pro and Con

By David Leonhardt December 3, 2009 6:11 pmDecember 3, 2009 6:11 pm

Should Ben Bernanke be reappointed the chairman of the Federal Reserve? The Senate Banking Committee is considering the question this week. Here’s a quick summary of the debate, with arguments from both the con and pro camps:

Brendan Smialowski for The New York Times

Bernie Sanders, the independent senator from Vermont, has become the public face of the anti-Bernanke camp, and Mr. Sanders’s Web site has a useful summary of his reasoning. In sum: “When you have a football coach who keeps losing games, you have to bring in someone new.”

Perhaps the strongest part of his case is the list of statements from Mr. Bernanke over the past few years that Mr. Sanders’s staff has dug up. These stretch over both his time as Fed chairman, which began in February 2006, as well as his previous time as a Bush administration adviser and a Fed governor. Among the highlights (the parenthetical comments are mine):

* July 1, 2005 (responding to a CNBC question about whether there was a housing bubble and whether it could cause a recession): “It’s a pretty unlikely possibility. We’ve never had a decline in house prices on a nationwide basis. So, what I think what is more likely is that house prices will slow, maybe stabilize, might slow consumption spending a bit. I don’t think it’s gonna drive the economy too far from its full employment path, though.”

* May 17, 2007: “We do not expect significant spillovers from the subprime market to the rest of the economy or to the financial system.”

* July 18, 2007 (a month before the subprime mortgage market began having problems and five months before the recession began): “Employment should continue to expand. … The global economy continues to be strong. … Financial markets have remained supportive of economic growth.”

* Feb. 28, 2008: “Among the largest banks, the capital ratios remain good, and I don’t expect any serious problems … among the large, internationally active banks that make up a very substantial part of our banking system.”

* June 9, 2008 (six months into the recession and three months before the financial panic began): “The risk that the economy has entered a substantial downturn appears to have diminished over the past month or so.”

Mark Thoma prefers an analogy to a doctor rather than a football coach. Mr. Thoma says that, yes, Mr. Bernanke got the diagnosis wrong. But so did many, many other economists. And, Mr. Thoma continues:

… the doctors who were put in charge — Bernanke in particular — persevered and began to understand more precisely what was going wrong and what was needed, and that allowed them to save the patient from a much, much worse fate. They deserve credit for that. The patient will live, and that wasn’t always so clear.

Still, when a liquidity and credit crunch emerged in the summer of 2007, Mr. Bernanke engineered a U-turn in Fed policy that prevented the crisis from turning into a near depression. He did this largely with actions and programs that were not in the traditional toolbox of monetary policy. … The Fed’s creative and aggressive actions have significantly reduced the risks of a near depression. For this reason alone Mr. Bernanke deserves to be reappointed so that he can manage the Fed’s exit from its most radical economic intervention since its creation in 1913.

Paul Krugman, the Nobel laureate and New York Times columnist, who is also a former Princeton colleague of Mr. Bernanke’s, made a similar point in August:

I think Bernanke has done a really good job. He failed to see this coming and he was behind the curve in early phases. But he’s been really very good in the sense that it’s really very hard to see how anyone could have done more to stem this crisis.

Mr. Krugman did offer one caveat in a blog post (but still came out on the side of reappointment):

I do have one qualm, though, which isn’t really about Bernanke, but rather about the broader symbolism of the reappointment — namely, it unfortunately seems to be a reaffirmation of Serious Person Syndrome, a k a, it’s better to have been conventionally wrong than unconventionally right.

While there is certainly room for reasonable people to question some of the specific decisions Ben has made, in general he has led the Federal Reserve System with humility, intelligence, wisdom and grace.

And Barry Ritholz, who likewise seems positively disposed, notes that Mr. Bernanke has strong support from most of his fellow economists.

Also: The PBS “NewsHour” Web site has put together a forum that includes both pro- and anti-Bernanke analysts, each of whom was asked to grade the chairman’s performance. Douglas Elliott of the Brookings Institution is among those in favor (grade: B+) and Mr. Galbraith (grade: C) is among those against.

Update: An earlier version of this post said CalculatedRisk seemed to be against Mr. Bernanke’s reappointment, based on this post. But CalculatedRisk wrote in with the following:

David, thanks for the mention. Earlier I came out in support of Bernanke (not my first choice though), but I’m having some second thoughts based on his comments today.

I’ve also defended Bernanke when people attacked his integrity – I think those attacks are completely baseless.

Bunning and DeMint had Bernanke say he failed in the four functions of the Fed. he said was the Feds responsibility during his initial confirmation. The man has got to go and maybe replace him with Bair who has done a good job with FDIC, albeit the regional banks have folded due to small business Main St. hemmorraging jobs, which has zeroed out the FDIC fund.

I pray the irony,hypocrisy and insanity of the suddenly inspired pundits and erstwhile economic “naysayers” is not lost on the rational world.Bernanke,like President Obama,is inheriting a dam that already was breaking,and trying to plug it under greater pressure and public awareness.We had the rare luxury of time in being able to assess the policies of Bernanke’s and the nations economic progenitor,Greenspan,who is the father of this unprecedented government made financial disasterI was long an admirer of Alan Greenspan,whose restraint and seemingly impervious nature to political pressure guided us for years. However,time was his ultimate enemy and ultimately he was intimidated by the gangsters of the Bush Administration (along with both houses of Congress and the media)and let the pressure of “liquidity culture” propagated by the unabashed greed of Corporate America(who control,totally,all branches of government)impede him from interceding on a scientific basis when rates needed to be raised in our country. The massive influx of primarily Chinese money,focusing on collateralized loans (mortgages) as the best risk return investment globally created an unprecedented oversupply of cash,which led to our current fiscal disaster.The Federal Reserve,intended to be a dispassionate,apolitical arm of the government has been comprimised completely by the Investment Banks and Corporate interests it was created to regulate,a natural conclusion to a Country and culture dominated by Capitalism as a lifestyle,or in plain terms,money whores.

The quotes from Sanders’ website seem enough for a thumbs down. I believe that some of those quotes were made untruthfully in the interest of positively affecting public opinion on the economy–another reason to let him go.

“As Fed Governor Bernanke supported the flawed policies of Alan Greenspan – he never recognized the housing bubble or the lack of oversight – and there is no question, as Fed Chairman, Bernanke was slow to understand the credit and housing problems. And I’d prefer someone with better forecasting skills.

However once Bernanke started to understand the problem, he was very effective at providing liquidity for the markets. The financial system faced both a liquidity and a solvency crisis, and it is the Fed’s role to provide appropriate liquidity. Bernanke met that challenge, and I think he is a solid choice for a 2nd term (not my first choice, but solid).”

Bernanke advocated and pursued the same policies as Greenspan, so how can you say Greenspan failed but Bernanke didn’t? And Bernanke was doing that well before the dam burst. See Sen. Sanders list of Bernanke quotes (link in the article). His complete lack of foresight and wisdom is astounding. At least Greenspan had the good grace to issue a mea culpa, frankly admitting that he was wrong. If Bernanke had the same grace he would withdraw his nomination.

Let’s find somebody with more foresight. Becoming a firefighter after helping to stoke the fires is better than doing nothing, but shouldn’t be enough to get one reappointed.

OhMyGawd…this guy is such a loser. Obama clings to him because…he was just like the other old Jewish guy he replaced: thinks way to much of himself, drawls out useless information, and gives-ultimately-bad financial advice. Can’t stand the sight of him, and I know I am not in the minority on this issue. Just because a bunch of other right-wing economists and bankers support him is the very reason we should get rid of him. He is being rewarded for crashing the boat, and not seeing the iceberg right in front of his nose: years of the Super Rich speculating with the dreams of the middle class in the real estate markets. Bailing out the banks while not bailing out the middle-class is a prep school notion. So elitist, and yesterday. We need more of a populist, visionary economist. Something along the lines of the British model. No more Old Boy stuff.

Francis,
Besides all that nonsense you typed (Chinese money? yeah that’s our problem), why not just go with the easier explanation, they’re all in this together.

Is the Fed that separated from corporate America or the current/past administration, where they all work before and after their time at the Fed? They all benefit from illusions of growth from cheap money. No one likes a Fed that tightens when it’s needed.

Bernanke always supported Greenspan’s moves before we realized Greenspan was wrong. If you supported Greenspan, then you’re wrong too.

Until now, Mr Leonhardt, whose pedigree is applied mathematics, in writing about economics has appeared to be a mere domestique in the progressive propaganda peleton.

And, I have been especially cranky lately (justifiably, I think) about the lack of objectivity in Mr Leonhardt’s reporting. To borrow a metaphor from a famous author reviewing “Audubon’s Butterflies; Moths and Other Studies”: does there not exist a high ridge where the mountainside of economic knowledge joins the opposite slope of journalistic objectivity? If so, Mr Leonhardt, the economics journalist, has been climbing the wrong foot hill on one side and below sea level on the other.

So, I was happy to see Mr Leonhardt climb to new heights in today’s column “Bernanke Pro and Con”. I hope the climb continues.

“Mark Thoma prefers an analogy to a doctor rather than a football coach. Mr. Thoma says that, yes, Mr. Bernanke got the diagnosis wrong. But so did many, many other economists.”

Mark Thoma being one of them. So why are we giving any importance to what an economist, who got the diagnosis completely wrong (along with Paul Krugman and Greg Mankiw), says in support about another economist who got it wrong? About the only one in the pro column who got the diagnosis close to right is Roubini.

Bernanke was thinking badly. He reminds me of a doctor whom I once consulted, who made one snap-diagnosis after another. Fortunately, as a scholar, I was able to question the diagnoses and discover the mistakes. But more dubious was the speed, the lack of scientific method used by this doctor. So I did the sensible thing, found another doctor who was a bit less convenient, but had higher intellectual standards.

In the case of Fed Chairman, too, we should look for higher standards: greater alertness, less tunnel vision.

The guy risked the central bank on his hypothesis, unproven, that saving the big banks would avert the recession. This was his analysis of the Depression, which is the basis of his academic credentials.

Didn’t work. Now the Fed is the “bad bank,” with more than a trillion dollars in MBS’s that are questionable at best. He didn’t see it coming. Didn’t effectively deal with it when it came. It is an exercise in exposing how bad the economic theories of the mainstream are wide of the mark. This will make the Fed’s mistakes in the first Depression seem like oversights.

Keynes and the New Deal were right then and they are right now. Build aggregate demand, lock down the financial casinos and make basic provisions for social security.

Let’s be honest with ourselves, at least; and if it’s not too much to ask, be fair about what the Fed can and CAN NOT do.

** How can we expect any small group of individuals to consistently value assets — houses, stocks, bonds or whatever — more accurately than the market?
** Is it the Fed chairman’s responsibility to tell people which stocks or houses are over-priced due to a speculative bubble?
** Even if the Fed chairman can accurately forecast speculative bubbles, what tools does the Fed have that could suppress prices in some markets without adversely affecting others?

The team coach and ship captain analogies are false. The Fed chairman does not have anywhere near the same level of control or authority.

Ben Bernanke had the wisdom to recognize the danger we were in when the financial markets began to unravel, and played a pivotal role in preventing another Great Depression. I don’t think any of his critics, especially among elected officials, would have had a clue about what to do.

I don’t blame Ben Bernanke or Alan Greenspan for the financial meltdown and subsequent recession. They may have made mistakes, but so did many, many other people. Greenspan’s libertarian-inspired faith in the Efficient Market hypothesis seems misplaced to me (I’m an engineer by training) but the underlying philosophy had a lot of bipartisan support for many years. Collectively, we did it to ourselves.

Where I give Ben Bernanke a great deal of credit is in having the intellectual honesty to recognize when a different approach was needed, and adapt accordingly. I think we were also very lucky that he just happened to know what NOT to do. Furthermore, it’s hard to imagine very many others who would have worked as long and hard as he did when the crisis was at its worst.

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